United States District Court, E.D. Pennsylvania
ARTESANIAS HACIENDA REAL S.A. de C.V., Appellant,
NORTH MILL CAPITAL LLC and LEISAWITZ HELLER, Appellees.
G. SMITH, J.
case arises from the appellees' alleged participation in
a scheme to loot the assets of an indebted company, to which
one appellee provided financing and the other legal services,
so that the company was unable to satisfy its debts to the
appellant. The litigation around this purported scheme has a
nearly four-year history, including proceedings before this
court, the bankruptcy court, and the court of appeals.
issue here is the appellant's appeal of the bankruptcy
court's decision dismissing its claims for lack of
standing. The appellant argues first that the bankruptcy
court erred in holding that core jurisdiction existed over
the case, and second that the bankruptcy court ignored
evidence showing it has standing to assert the claims at
issue. Specifically, the appellant points to its agreement
with the bankruptcy trustee-encompassed in an order a
different bankruptcy court judge entered-which it claims
establishes that the trustee relinquished standing over the
claims. Alternatively, the appellant argues that its claims
are particularized to it, and thus are not claims the trustee
ever had standing to bring, a position the trustee also
adopted in an affidavit. The appellees respond that the
bankruptcy court's decision was proper in all respects,
because (1) as this court previously held in referring the
case to the bankruptcy court, bankruptcy jurisdiction exists
over the claims, and (2) the appellant alleges a generalized
harm that, even if true, all creditors would have suffered.
thorough review of the pleadings, the bankruptcy court's
opinion dismissing the action, the parties' briefing, and
the relevant jurisprudence, the court concludes that
“related to, ” but not core, bankruptcy
jurisdiction exists over the appellant's claims, because
although the claims do not arise under the bankruptcy code or
exist only in the bankruptcy context, their outcome could
nevertheless have a conceivable effect on the estate. The
court has therefore treated the bankruptcy court's
decision as a recommendation and conducted a plenary review
of the appellant's standing to assert the claims. The
court holds that the bankruptcy court's standing decision
was correct, because the asserted causes of actions belonged
to the estate and therefore accrued to the trustee when the
debtor filed for bankruptcy. This is true as a matter of law,
and the trustee's conclusion to the contrary therefore
does not mandate a different result. Moreover, although a
trustee may relinquish certain claims to a creditor under
limited circumstances, those circumstances are not present
here and would only allow a creditor to seek damages on
behalf of the estate in any event. Accordingly, the court
will affirm the decision of the bankruptcy court.
PROCEDURAL HISTORY AND FACTUAL ALLEGATIONS
appellant, Artesanias Hacienda Real S.A. de C.V.
(“AHR”), filed a complaint against Wilton
Armetale, Inc. (“Wilton” or the
“Debtor”) and its sole shareholder, director, and
officer, Ivan Jeffery (“Jeffery” or the
“Fiduciary”), on November 27, 2015, seeking a
money judgment for wares it sold to Wilton for which it had
not been paid. Artesanias Hacienda Real S.A. DE C.V. v.
Wilton Armetale, Inc., et al., Civ. A. No. 15-6350, Doc.
No. 1. On April 6, 2016, the court entered summary judgment
in favor of AHR and against Wilton in the amount of $900,
658.17, plus prejudgment interest. Artesanias Hacienda Real
S.A. DE C.V. v. Wilton Armetale, Inc., et al., Civ. A.
No. 15-6350, Doc. No. 20. On April 29, 2016, this court
entered summary judgment in favor of AHR and against Jeffery
in the amount of $900, 658.17, plus interest, and ordered
Jeffery to deliver to AHR's counsel all shares of stock
in Wilton. Artesanias Hacienda Real S.A. DE C.V.
v. Wilton Armetale, Inc., et al., Civ. A. No. 15-6350,
Doc. No. 25. AHR recorded the April 6, 2016 order with the
Lancaster County Prothonotary as a judgment lien against
Wilton's Mt. Joy real estate. Amended Opening Appellate
Brief of Plaintiff/Appellant Artesanias Hacienda Real S.A. de
C.V. (“Am. AHR Br.”) at 8, Doc. No.
court's April 29, 2016 order, Jeffery delivered his
Wilton shares to AHR's affiliate, following which the
affiliate terminated Jeffery's positions with the
company, installed new management, and contacted one of the
appellees in this action, Leisawitz Heller-counsel to both
Wilton and Jeffery-to waive attorney client privilege and
demand the documents which AHR believed were necessary to
enforce its lien. Id. at 8-9. AHR alleges that
during the discovery that followed, it uncovered evidence
that Jeffery, in his capacity as Wilton's sole director,
signed [an] agreement to sell all Wilton's non-real
estate assets for only $725, 000 to North Mill [Capital
LLC's] hand-picked liquidator Gordon Brothers, and for
payment of all that $725, 000 directly to North Mill, thereby
leaving Wilton without funds or resources to protect its Mt.
Joy real estate (which had been appraised as having an
‘as is' fair market value of $895, 000)[.]
Id. at 9-10 (internal citations omitted). AHR
further alleges that Leisawitz Heller, as Wilton and
Jeffery's counsel, arranged for the other appellee in
this action, North Mill Capital, LLC (“North
Mill”), to sign a separate agreement providing that
Jeffery would receive a bribe, equal to 20% of the net
proceeds of the real estate transaction, in exchange for
approving the sale. Id. at 10. North Mill, again
with Leisawitz Heller's assistance, then allegedly filed
inflated confessions of judgment against and sought to
foreclose on Wilton's real estate. Id. at 10-11.
AHR asserts that but for the purported scheme, AHR could
“have enforced its recorded judgment lien and so
recovered the judgment owed [AHR] from [the] sale of
Wilton's real estate.” Id. at 12.
filed a complaint regarding the above allegations against
North Mill and Leisawitz Heller in a separate action on
August 2, 2016. Artesanias Hacienda Real S.A. de CV v.
North Mill Capital, LLC, et al., Civ. A. No. 16-4197,
Doc. No. 1. The next month, Wilton filed for bankruptcy. Am.
AHR Br. at 13. AHR filed an amended complaint on January 3,
2017, asserting causes of action for aiding and abetting
breach of fiduciary duties, conspiracy to breach fiduciary
duties, conspiracy for fraudulent transfer, and conspiracy to
engage in the commercially unreasonable disposition of
assets. First Am. Compl. at ¶¶ 66-147,
Artesanias Hacienda Real S.A. de CV v. North Mill
Capital, LLC, et al., Civ. A. No. 16-4197, Doc. No.
receiving supplemental briefing from the parties on whether
the action should be resolved independently of Wilton's
bankruptcy proceedings, this court referred the case to the
United States Bankruptcy Court for the Eastern District of
Pennsylvania, indicating that “it appear[ed] that this
matter would constitute a ‘core proceeding' . . .
[or a]t a minimum, [that] this matter [wa]s related to the
bankruptcy proceeding [then] pending in the Bankruptcy
Court.” July 12, 2017 Order at 1, n.1, Artesanias
Hacienda Real S.A. de CV v. North Mill Capital, LLC, et
al., Civ. A. No. 16-4197, Doc. No. 79 (internal
citations omitted). Leisawitz Heller then sought a writ of
mandamus from the Third Circuit, arguing that the case was
properly before this court, because bankruptcy court
jurisdiction did not exist. Petition for Writ of Mandamus,
Doc. No. 6-36. North Mill filed an answer to the petition,
arguing in support of the writ's issuance. Answer to Pet.
for Writ of Mandamus, Doc. No. 6-37. AHR filed an opposition,
arguing that Leisawitz Heller did not meet the standard for a
writ of mandamus and should be estopped from arguing that
bankruptcy jurisdiction did not exist because it had
previously taken the opposite position before this court.
Opp. of Resp't Artesanias Hacienda Real S.A. de C.V. to
the Pet. of Leisawitz Heller for Writ of Mandamus, In re:
Leisawitz Heller, No. 17-2710 (3d Cir.). The Third Circuit
seemingly agreed, entering an order on August 7, 2017,
stating only that “[t]he foregoing petition [wa]s
denied.” Special App. at ECF p. 53, Doc. No.
matter then moved forward in the United States Bankruptcy
Court for the Eastern District of Pennsylvania. The Honorable
Jean K. FitzSimon dismissed the amended complaint on December
6, 2018. Bankr. Ct. Op. at 1, Doc. No. 1-1. First, Judge
FitzSimon held that the bankruptcy court had core
jurisdiction “[b]ecause this matter involves a matter
concerning the administration of the estate, or a proceeding
affecting the liquidation of the assets of the estate . . .
.” Id. at 1 n.1 (citing 28 U.S.C. §
157(b)(2)(A), (O)). Second, she held that AHR lacked standing
to assert the claims, because “[a]ll of the
Debtor's creditors were affected by the alleged
collusion, ” and therefore it was for the trustee to
bring any applicable causes of action. Id. at 5, 7.
appealed the decision on December 21, 2018, challenging the
bankruptcy court's holdings that bankruptcy court
jurisdiction existed over the matter and that AHR lacked
standing to bring the claims, as well as the resulting
dismissal of the amended complaint. Notice of Appeal at 1,
Doc. No. 1-1. AHR filed a brief on February 17, 2019.
Doc. No. 6. On March 1, 2019, North Mill filed an emergency
motion for an expedited briefing and hearing schedule and a
motion to amend the record, seeking to exclude certain
materials that AHR had designated in the appellate
record-namely, an affidavit from AHR's counsel attaching
several exhibits that he had filed with the bankruptcy court
without leave ten days before oral argument-or alternatively,
to supplement the record with additional materials-namely,
AHR's opposition to Leisawitz Heller's petition for a
writ of mandamus before the Third Circuit. Doc. No. 7. AHR
filed a response in opposition to this motion on March 4,
2019. Doc. No. 9. The court held oral argument on the
emergency motion on March 20, 2019, during which the parties
agreed to the entry of an order in which (1) the court would
strike AHR's counsel's affidavit from the appellate
record, but the court would not strike the attached exhibits
to the extent they were elsewhere in the record; and (b) the
court would supplement the appellate record with AHR's
opposition brief filed in the mandamus action. Order at 1-2,
Doc. No. 12. The court also set deadlines for AHR to file an
amended brief, substituting citations to the affidavit
exhibits with citations to those documents elsewhere in the
record, as well as for North Mill and Leisawitz Heller to
file reply briefs. Id. at 2.
filed its amended brief on March 25, 2019. Doc. No. 14.
Leisawitz Heller and North Mill filed separate briefs in
response on April 26, 2019. Doc. Nos. 16, 18. AHR filed
replies in further support of its appeal on May 10, 2019,
arguing as to North Mill that its brief should be stricken
for failure to comply with the formatting requirements of
Rule 8015 of the Federal Rules of Bankruptcy Procedure. Doc.
Nos. 19, 20. North Mill filed a motion for leave to file a
corrected appellee's brief to fix the formatting issues,
which the court granted as unopposed on June 5, 2019. Doc.
Nos. 22, 24. North Mill filed a corrected brief on June 5,
2019. Doc. No. 25. AHR also filed a “request to take
judicial notice of proceedings in the bankruptcy court,
” relating to the transcript of a May 7, 2019 hearing
before Judge FitzSimon, Doc. No. 21, to which Leisawitz
Heller filed an opposition. Doc. No. 23. This matter is now
ripe for resolution.
Standard of Review
on appeal from a final order entered by a bankruptcy court,
the district court reviews the order using the traditional
standards of review: Regarding the bankruptcy court's
legal conclusions, the district court reviews those
conclusions de novo. In re Trans World Airlines,
Inc., 145 F.3d 124, 131 (3d Cir. 1998) (citation
omitted). The court reviews the bankruptcy court's
findings of fact to examine whether they are “clearly
erroneous.” Am. Flint Glass Workers Union v. Anchor
Resolution Corp., 197 F.3d 76, 80 (3d Cir. 1999)
(quoting In re Krystal Cadillac Oldsmobile GMC Truck,
Inc., 142 F.3d 631, 635 (3d Cir. 1998)). However,
although the bankruptcy decision here was framed as a final
order, as discussed below, this court concludes that the
bankruptcy court only had “related to”
jurisdiction. Therefore, the court conducts a plenary review
of all findings in light of AHR's objections and treats
all holdings as recommendations, rather than conclusions.
See 28 U.S.C. § 157(c)(1) (stating that under
“related to” jurisdiction, bankruptcy court
“submit[s] proposed findings of fact and conclusions of
law to the district court, and any final order or judgment
shall be entered by the district judge after considering the
bankruptcy judge's proposed findings and conclusions and
reviewing de novo those matters to which any party has timely
and specifically objected.”); see also In re
Montgomery Ward & Co., Inc., 428 F.3d 154, 160 n.12
(3d Cir. 2005) (“The bankruptcy court makes final
decisions in core matters which can be appealed to the
district court. But in non-core cases the bankruptcy court
can make only recommendations to the district court.”).
Bankruptcy Court Jurisdiction
first argues that the bankruptcy court lacked jurisdiction
over the claims at issue. Am. AHR Br. at 35-40. Bankruptcy
courts have jurisdiction over “core” proceedings
or matters “related to” a bankruptcy proceeding.
In re Resorts Int'l, Inc., 372 F.3d 154, 162 (3d
Cir. 2004). In the Third Circuit, courts follow a two-step
test to determine whether a claim is a core proceeding.
First, the court considers whether the claim falls under the
“illustrative list” in 28 U.S.C. § 157(b).
Halper v. Halper, 164 F.3d 830, 836 (3d Cir. 1999).
If so, the court then applies the core proceeding test:
“[A] proceeding is core  if it invokes a substantive
right provided by title 11 or  if it is a proceeding, that
by its nature, could arise only in the context of a
bankruptcy case.” Id. (alterations in
original) (quotation marks and citations omitted).
a matter does not meet the requirements for core
jurisdiction, it is nonetheless “related to” the
bankruptcy proceedings if the “proceeding could
conceivably have any effect on the estate being administered
in bankruptcy.” Id. at 837 (quoting Pacor,
Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984),
overruled on other grounds by Things Remembered, Inc. v.
Petrarca, 516 U.S. 124 (1995)). A plaintiff's claims
“need not necessarily be against the debtor or against
the debtor's property” to be “related
to” the bankruptcy, so long as they “could alter
the debtor's rights, liabilities, options, or freedom of
action (either positively or negatively) [or could] in any
way impact upon the handling and administration of the
bankrupt estate.” Pacor, Inc., 743 F.2d at
994; cf. Saul, Ewing, Remick & Saul v. Provident
Savings Bank, 190 B.R. 771, 775 (D. Del. 1996)
(“Saul”) (“Therefore, disputes
between parties other than the debtor generally do not invoke
the court's ‘related to' jurisdiction of §
1334 unless the action would have some effect on the
bankruptcy estate.” (emphasis added)).
fact that a plaintiff commenced the action before the debtor
filed for bankruptcy does not foreclose the existence of
bankruptcy jurisdiction. See Pacor, Inc., 743 F.2d
at 986 (plaintiffs' suit preceded chapter 11 petition);
In re United Stairs Corp., 176 B.R. 359, 363-64
(Bankr. D.N.J. 1995) (plaintiffs' suit preceded chapter 7
petition). Indeed, Federal Rule of Bankruptcy Procedure 9027
explicitly provides for removal to the Bankruptcy Court of
“civil action[s] initiated before commencement of the
case under the [Bankruptcy] Code.” Fed.R.Bankr.P.
9027(a)(2) (emphasis omitted). The court considers all claims
separately to determine whether bankruptcy jurisdiction
exists over each claim. See Halper, 164 F.3d at 839
(adopting “claim-by-claim approach” to assessing
brought six claims against North Mill and Leisawitz Heller:
(1) aiding and abetting breach of fiduciary duties owed AHR
as a creditor of insolvent corporation Wilton against North
Mill; (2) the same claim against Leisawitz Heller; (3)
conspiracy to breach fiduciary duties owed insolvent
corporation Wilton and its creditor AHR against both
defendants; (4) fraudulent transfer against both defendants;
(5) conspiracy for fraudulent transfer against both
defendants; (6) conspiracy to engage in the commercially
unreasonable disposition of the Debtor's assets against
both defendants. First Am. Compl. at ¶¶ 66--147.
The court assesses each claim separately for jurisdictional
purposes. Harper, 164 F.3d at 839.
Breach of Fiduciary Duty and Conspiracy to Breach Fiduciary
disagree about whether breach of fiduciary duty claims fall
under a bankruptcy court's core jurisdiction or are more
appropriately treated as “related” claims. In
In re South Canaan Cellular Investments, LLC, the
court held that core jurisdiction existed over the
debtor's claims that a creditor aided and abetted its
shareholder's breach of fiduciary duty as “part of
the claims allowance process that could only occur in this
bankruptcy case.” 427 B.R. 85, 92 (Bankr. E.D. Pa.
2010) (citations omitted). The court then found it had
“related to” jurisdiction over the debtor's
breach of fiduciary claims against its shareholder, because
“the relief requested include[d] a demand for damages
and for equitable relief that, if successful, would increase
the assets of the bankruptcy estate available for
distribution.” Id. at 92 (citing Matter of
Delaware & Hudson Ry. Co., 122 B.R. 887, 894-95 (D.
Del. 1991); In re Jamuna Real Estate, LLC, 357 B.R.
324, 336 (Bankr. E.D. Pa. 2006)).
contrast, the Bankruptcy Court for the District of Delaware
held in In re Allied Systems Holdings, Inc.,
“[i]ndeed, the overwhelming majority of courts in this
district and other districts conclude that breach of
fiduciary claims do not involve the application of bankruptcy
law, are ordinary state law causes of action, and could
proceed outside the bankruptcy court.” 524 B.R. 598,
606 (2015) (footnote omitted). However, the court went on to
find that although core jurisdiction did not exist,
“related to” jurisdiction allowed the court to
hear the claims because “if the [Unsecured
Creditors'] Committee is successful on its claims, it
could conceivably increase the size of the estate.”
Id. at 607 (footnote omitted); see also In re
Zhejiang Topoint Photovoltaic Co., Ltd., No. 14-24549
(JNP), 2017 WL 6539481, at *3 (Bankr. D.N.J. 2017) (holding
that core jurisdiction did not apply to breach of fiduciary
duty claims because action did not arise under Chapter 11,
but “related to” jurisdiction existed because
success on claims “would result in a larger
distribution to creditors”); In re Domiano,
422 B.R. 497, 500 (Bankr. M.D. Pa. 2009) (holding, without
explanation, that “related to” jurisdiction
existed over debtor's breach of fiduciary duties claims
against creditor); In re Jamuna Real Estate, LLC,
357 B.R. at 336 (“While the Third Circuit has not had
occasion to decide whether such claims are core or not, the
majority of courts which addressed the question have held
that a cause of action for breach of fiduciary duty is a
non-core, related proceeding.” (collecting cases)).
court likewise follows that approach and deems the breach of
fiduciary duty and related aiding and abetting claims to be
related, non-core claims. Although the claims are not listed
under § 157(b), do not invoke a substantive right under
Title 11, and are not the sort of claims that could only
arise in the context of a bankruptcy case, as explained
further below, the damages AHR seeks would belong to the
estate, and therefore increase the pool of assets available
to satisfy the outstanding liabilities owed to all creditors.
Fraudulent Transfer Claims
asserts fraudulent transfer and conspiracy to commit
fraudulent transfer claims under the Pennsylvania Uniform
Fraudulent Transfer Act (“PUFTA”). First Am.
Compl. at ¶¶ 102-134. Essentially, AHR asks the
court to avoid the purportedly fraudulent transfer, either by
invalidating North Mill's lien or by awarding damages
commensurate with the value of the transferred property.
bankruptcy trustee may “avoid any transfer of an
interest of the debtor in property or any obligation incurred
by the debtor that is voidable under applicable law by a
creditor holding an unsecured claim that is allowable
under” other sections of the Bankruptcy Code. 11 U.S.C.
§ 544(b)(1). This “allows the bankruptcy
trustee to stand in the shoes of an actual creditor who may
avoid a transfer under applicable nonbankruptcy law, ”
including the PUFTA. In re Polichuk, 506 B.R. 405,
417 (Bankr. E.D. Pa. 2014) (citation and footnote omitted);
see also In re Int'l Auction and Appraisal
Servs. LLC, 493 B.R. 460, 463 (Bankr. M.D. Pa. 2013)
(“Section 544 enables a trustee to use state law to
avoid any transfer that an unsecured creditor could have
avoided outside of bankruptcy.”); In re Titus,
467 B.R. 592, 600 (Bankr. W.D. Pa. 2012) (“The
fraudulent transfer action includes three counts and is
pursued pursuant to Pennsylvania state fraudulent transfer
law via 11 U.S.C. § 544(b)(1).”), vacated in
part on other grounds, Titus v. Shearer, 498 B.R. 508
(W.D. Pa. 2013).
In re Rosenblum, the court held that “related
to” jurisdiction applied to ...